Fed will cause ‘acute damage to growth’ in inflation battle before pivot, BlackRock warns

According to BlackRock, the world’s largest asset manager, the market’s view of interest rate hikes is more volatile as long as central banks think they can tame high inflation without “crushing growth”.

“We expect more volatility until central banks take sides in the difficult growth-inflation trade-off they face,” strategists at the BlackRock Investment Institute said in a note Monday. “We believe the Fed will over-tighten rates and cause serious damage to growth before pivoting.”

The Federal Reserve kicks off its two-day policy meeting on July 26, and many investors expect it to end with another big interest rate hike in a bid to quell the highest inflation since. four decades.

“The Fed is expected to raise rates an additional 0.75% or more this week as it strives to raise the federal funds rate into restrictive territory to contain inflation,” BlackRock strategists said. An increase of three-quarters of a percentage point would bring the fed funds rate into a target range of 2.25% to 2.5%.

Market expectations for future Fed and European Central Bank policy rates have “swinged up and down over the past year,” according to a chart in their note that cites data from Refinitiv. Solid lines show “market expectations for 1-year rates a year ahead based on interest rate swaps.”

NOTE FROM BLACKROCK DATED JULY 25, 2022

“Market prices for the federal funds rate rose from near zero to nearly 4% in June,” the strategists said. “This epic move was followed by a one percentage point drop in just one month.”

Meanwhile, Fed forecasts suggest it thinks it can bring the surge in inflation back to its 2% target without hurting growth.

“Central banks believe they can rein in inflation and cause only a slight slowdown, when in reality this is unlikely in our view,” the strategists wrote. They “ignored the difficult trade-off they face: crush growth or live with some inflation.”

BlackRock says a “soft landing” is unlikely and the Fed will pivot next year once the economic impact of its rate hikes is clear, according to their note.

“The market agrees,” the strategists said. “Rate projections now show that the Fed will cut rates in 2023. That aligns with our view.”

Lily: Will the Federal Reserve stifle a stock market rebound? What investors will be watching.

The U.S. stock market was trading mixed in the early afternoon on Monday as investors anticipated the Fed meeting and a flurry of corporate earnings reports this week. The Dow Jones Industrial Average DJIA,
+0.03%
was up about 0.4%, while the S&P 500 SPX,
-0.09%
rose 0.3% and the Nasdaq Composite COMP,
-0.60%
slipped 0.1%, according to FactSet data, when last checked.

In the bond market, the yield on the 10-year Treasury note TMUBMUSD10Y,
2.821%
was trading about 3 basis points higher at around 2.81%, after falling over the past two weeks, according to Dow Jones Market Data.

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